Stocks tumble on Greenspan remarks

Dollar rallies on expectations of higher interest rates

By

MarkCotton

NEW YORK (CBS.MW) -- U.S. stocks ended sharply lower Tuesday, tumbling in the last half-hour of trading after Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee that deflation was no longer a threat.

Investors interpreted the comments as a sign that inflationary pressures were picking up in the economy, which could lead to a rise in U.S. interest rates sooner rather than later.

The dollar rallied on hopes that higher U.S. rates would help close the yield differential that makes Europe a relatively more attractive investment than the United States, boosting demand for the greenback.

The Dow Jones Industrials Average
DJIA, +1.38%
ended just off its low for the session, down 123.35 points, or 1.2 percent, at 10,314.50. Ahead of Greenspan's testimony, the benchmark index was in positive territory, hitting an intraday high of 10,487.67 in morning trading.

The Nasdaq Composite
$COMPQ
was down 41.80 points, or 2.1 percent, at 1,978.63, wiping out the prior session's 1.2 percent gain.

Technology stocks, which are often viewed as cyclical in nature and thus sensitive to interest-rate moves, sold off sharply. Semiconductor shares led the slump, with the Philadelphia Semiconductor Index
SOX, +2.30%
dropping 3.6 percent.

On the Dow, General Motors
GM, +0.91%
was one of only two stocks to end higher. The carmaker gained 3.5 percent as investors cheered its raised full-year profit outlook and forecast-beating first-quarter earnings.

Verizon
VZ, +0.46%
was the other winner, eking out a 0.3 percent gain.

Pfizer and Altria Group, two Dow components that also reported earnings, ended down 2.3 percent and 0.2 percent, respectively.

No deflation worries

In brief remarks on the economy during testimony to the banking committee, the Fed chairman said threats of deflation "are no longer an issue."

The U.S. economy is "picking back up" after a slow spot in the first quarter, he said. "Clearly it's a change that has occurred in the last number of weeks ... a change that's long overdue and most welcome," Greenspan said. "It's more anecdotal than it is statistical at this point, but the anecdotes are fairly convincing."

Greenspan also said "pricing power is gradually being restored." See full story.

Mike Holland, fund manager at Holland Balanced Fund, said he did not find "anything earth-shaking or nerve-rattling," in Greenspan's remarks.

"Therefore some people who wanted a reason to feel spooked about his comments and take the market lower said, 'Well, maybe interest rates are going to go up sooner and in a larger fashion than we otherwise expected."

Greenspan returns to Capitol Hill on Wednesday, with remarks due before the Joint Economic Committee.

The federal funds rate, the overnight U.S. lending benchmark, is currently at a 46-year low of 1 percent.

Currencies, gold, oil, bonds

On the currency markets, the U.S. dollar built on early gains following Greenspan's deflationary remarks

The euro fell 1.3 percent against the greenback, to $1.1846. The British pound also pulled back, sliding 1.1 percent to $1.7859.

Against the Japanese yen, the dollar climbed 0.4 percent to 108.77.

Early strength for the dollar came after a survey showed investors were turning increasingly negative on the current state of Germany's economy, the largest in the eurozone.

Meanwhile, gold futures fell back under $400 an ounce on the New York Mercantile Exchange to trade at a three-session low on the firmer dollar.

Treasury prices closed lower and yields moved higher as the Fed chairman's testimony did little to alter the view that U.S. interest rates will be higher by the end of the year.

Uncertainty a day ahead of updates on U.S. petroleum inventories, and volatility on the last day of trading for May futures, sent the two key contracts for crude in opposite directions.

On the New York Mercantile Exchange, May crude closed at $37.60 per barrel, up 18 cents for the session after trading at a low of $37.05. June crude, which became the lead-month contract at the session's close, fell by 25 cents to close at $36.50 per barrel.

Dow standouts

Turning back to the equities market, GM's shares soared after the carmaker posted first-quarter earnings that trounced analyst expectations. The company also lifted its 2004 earnings outlook. See full story.

Neither of the other two Dow component stocks to report results could repeat this performance, however.

Pfizer
PFE, +0.14%
reported a first-quarter profit of 52 cents a share on an adjusted basis, a penny ahead of the consensus average of 24 analysts compiled by Thomson First Call.

Revenue climbed 47 percent, buoyed by the revenue contribution from Pfizer's Pharmacia acquisition. The company also reiterated its 2004 earnings outlook. See full story.

Shares of Pfizer traded down 2.3 percent at $36.70.

Altria
MO, +2.66%
posted first-quarter earnings of $2.19 billion, or $1.07 per share, flat with its year-ago profit. The latest results reflect the impact of restructuring charges totaling 9 cents per share. Revenue increased 12.7 percent in the latest three months to $21.8 billion from $19.4 billion in the same period a year earlier. Altria said favorable currency translations added an estimated $1.3 billion to its revenue in the quarter.

The average estimate of 11 analysts polled by Thomson First Call was for a clean profit of $1.13 per share in the March period. Shares of Altria slipped 0.2 percent to $56.33.

Among technology stocks reporting earnings, Lucent Technologies
LU
posted its third quarterly profit in a row, helped by growth in sales overseas. Sales, however, dipped 9 percent to $2.19 billion in the fiscal second quarter. Shares of the telecom equipment maker ended down 10.2 percent at $3.89.

Black & Decker
BDK
reported a first-quarter profit a penny ahead of analyst estimates. The company also gave second-quarter and full-year updates, well ahead of current analyst expectations. Shares of the toolmaker and appliance producer closed down 2.3 percent at $58.79.

Telecom earnings

Bell South
BLS, +25.00%
and SBC Communications
SBC, +0.46%
ended flat after spending most of the session posting solid gains on a strong first-quarter performance from Cingular Wireless, the cellphone network co-owned by the two regional telephone operators.

Cingular said it added a net 554,000 customers in the first quarter, improving revenue by 8.4 percent to $3.9 billion.

Operating income, however, fell to $559 million from $716 million in the year-ago period, though it did rise from $329 million in the prior quarter.

AT&T Wireless
AWE, +0.00%
which is being acquired by Cingular, reported that it lost 367,000 customers in the first quarter, in an earnings statement timed to coincide with the release of Cingular's results. Shares of AT&T Wireless ended up 1.8 percent at $13.82.

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